TAKING STEPS TO REIN IN THE HIGH COST OF LAND IN JAPAN

ByPaul Blustein

October 21, 1990

TOKYO -- For millions of Japanese, skyrocketing real estate prices have been a nightmarish ordeal.

The cost of tiny apartments in some urban areas has zoomed past $1 million. Young couples in Tokyo have found that the only way they can own their own homes is to endure torturous commutes or sign 100-year mortgages, passing the loan on to children and grandchildren in recognition that few can afford to pay for the property in a single lifetime. And some mortgage companies even lend up to 110 percent of the purchase price on the theory that prices can only go up.

The run-up in land prices has proven to be one of modern Japan's most serious social and economic problems, leading to a division of Japanese society into haves and have-nots. Among recent examples was a report in the Mainichi Shimbun newspaper of a substantial increase in court cases involving inheritance battles between brothers and sisters because their middle-class parents had left behind one extremely valuable asset: the family home.

But now, after years of doing little more than issuing edicts against speculative excesses, the Japanese government is embarking on some forceful measures aimed at deflating the nation's real estate "bubble."

Some of the new policies are still in the nascent stage. But their impact could be profound -- not only here but worldwide. They could even prove excessively effective if, instead of gradually declining, land prices suddenly plunge.

A nose dive in property values could be disastrous because Japan's banks and other financial institutions have financed hundreds of billions of dollars worth of real estate purchases in recent years. Losses on real estate loans would add significantly to the woes facing those institutions, which already have suffered a substantial erosion in their profits and capital cushions as a result of the 37 percent drop in Japanese stocks since the beginning of the year.

It is a situation of more than casual interest to the United States. Serious losses on real estate investments would undoubtedly exacerbate a trend among Japanese money managers to put less money into risky foreign markets. That, in turn, could spell trouble for the United States, which has grown dependent on a continual stream of money flowing in from Japan.

As a gradual decline, on the other hand, an end to the Japanese land boom could benefit the United States and other countries' economies. The U.S. government has long contended that high real estate prices constitute a "structural" barrier to trade because the cost of housing -- and the lack of space in Japanese homes -- makes families here less likely to buy imported goods such as furniture or refrigerators. So a lowering of prices might help stoke demand.

Whatever happens to prices, the government is showing a new determination to bring them down. Among the most dramatic initiatives is a proposal by a special commission, scheduled to be unveiled later this month, for a new national tax on the holding of land. Legislators are likely to water down the proposal somewhat in response to objections from industry, which would be hardest hit. But because the plan has been carefully crafted to exempt middle-class homeowners and because it has the backing of the powerful Finance Ministry, many of its important features are expected to be enacted into law.

The tax proposal comes on top of a severe tightening of interest rates by the Bank of Japan, the nation's central bank. Eight weeks ago, the bank raised its benchmark interest rate to 7 percent -- nearly three times the May 1989 level -- in part to make life difficult for speculators who are borrowing in anticipation of higher real estate prices.

And at the same time, bank regulators are cracking down on real-estate lending with new zeal, spurred by the deepening problems of Sumitomo Bank, the world's third-largest. Sumitomo, already reeling from a stock-trading scandal and the resignation of its chairman, has recently been forced to bail out Itoman & Co., a troubled Osaka firm that borrowed heavily from Sumitomo to buy real estate and is now liquidating billions of dollars worth of its holdings.

"The speculators are suddenly being hit very hard from several different directions," said Tom Hill, a real estate analyst at the Tokyo office of the S.G. Warburg securities firm. For the real estate industry, said Kazunobu Magome, an official at Tokyu Land Corp., "these are like body blows."

The real estate bubble hasn't burst yet, however. Magome said his firm continues to see strong demand for "resort mansions" -- the Japanese term for vacation condominiums -- in the $250,000 range.

In many areas, prices have continued to soar, confounding forecasters who for years have been predicting that a crash is imminent. According to the most recent national survey, average land prices throughout the nation rose by 13.7 percent in the 12 months ended June 1990, with spectacular surges (a few in the 100 percent to 200 percent range) reported in suburbs, large regional cities and resort areas.

But there are scattered signs of softening, such as reports that condo prices in the super-hot Osaka market have retreated from their highs. And many analysts predict that the price spiral will eventually halt -- perhaps even reverse substantially -- under the influence of the new government measures.

"There have been Cassandras before" who have wrongly forecast a crash in Japanese land prices, noted Kermit Schoenholtz, a vice president at Salomon Brothers Inc.'s Tokyo office. "But the difference is, this time interest rates really are higher, and the overall carrying costs" of holding real estate with the new land tax factored in "are likely to be much higher," he said. "That is bound to have an effect."

The prospect of a real estate crunch already has prompted Moody's Investor Services Inc. to lower its credit ratings of several major Japanese banks, including Dai-Ichi Kangyo Bank Ltd., the world's biggest.

The agency's Tokyo bank analyst, Shinji Okabe, emphasized that he believes the chances of a big Japanese bank failure are extremely remote, given the size of the banks' capital cushions. "But the risks to their profits are increasing," he said.

Government officials make it clear that they intend to pursue their new approach and that they believe the risks are manageable. At an appearance before reporters last week, Bank of Japan governor Yasushi Mieno gloated about how "the prices of condominiums in big cities and even housing plots" in a wealthy Tokyo area are now coming down.